Getting the oil debate right
Oil is one of the most traded commodities in the World characteristic of price fluctuation which affect producers and consumers alike. The daily changes in the price of crude oil on the international market has both short and long term impact on the economies of producing nations and the global economy with a daily consumption of more than 85 million barrels. The growth of the global economy increases the demand for oil because it remains the most valuable factor of production for industrial and manufacturing economies.
Recent announcement in Liberia that deposit of oil has been discovered of commercial value has generated huge debate from politicians and Liberian economists and officials of the National Oil Company of Liberia. I have read the tweet of analysis suggesting ways of avoiding the ‘Dutch disease’ and some labelling the discovery as a blessing and or curse. I do have enormous respect for those who have invested time and energy trying to ponder over the oil debate and are in many ways giving to the government and the public something to talk about. However, I like to provide additional analytical economic and policy understanding that would probably shape the argument in a more productive discourse rather than being philosophical and mystical as the recent thread of argument suggests. I argue that the discovery of oil in Liberia is neither a ‘curse nor blessing’ and refute the claim of those who are analysing it from the Dutch disease scenario. This paper will then articulate the way forward for a prudent management of oil revenue in Liberia in order to avoid any future disruption in production.
Let me begin by respectfully disagreeing with those who hold the view that Liberia is prone to fall prey to the Dutch disease situation. This is not possible because Liberia has never been an industrialized country. The Dutch disease is the abandonment of industrial and manufacturing sectors by an industrialized or manufacturing country after the discovery of natural resources. Historically, the structure of the Liberian economy is natural resource base with most of the country’s income coming from iron ore, rubber (land), timber, gold and diamond. Where are the manufacturing industries that will be abandoned by Liberia during the oil boom? Of course not. The Dutch disease argument is completely out of order and it is meant to romanticize the oil debate which might take away the constructive macroeconomic solution to the problems associated with natural resource management.
It is also unrealistic for people to think of investing oil revenue in manufacturing because Liberia has limited skilled and professional labour force that is more attracted to the unskilled labour market provided by the natural resource market. It will be difficult for Liberia to have a comparative advantage in manufacturing because the structure of the economy is natural resource driven. Furthermore, manufacturing in Liberia will not only leak our limited capital but will be less attractive and non-competitive in the global manufacturing market...
Let’s take a closer look at the most frequently used cliché (Curse or blessing) that is used by many analysts in describing the socio-economic condition surrounding oil in developing countries. The debate and analysis should not follow the antique and evil phrase used by behind-the-scene oil cartel in destabilizing the oil industries mainly in developing countries. The analysis of crude oil production in Liberia should not be about ‘curse or blessing’ it should instead be about proper management and improper management. Replacing the curse –blessing cliché with prudent management and imprudent management of oil resources in Liberia would provide a platform for better and insightful economic and political discussion in seeking microeconomic and macroeconomic solutions to the struggling economy. For example, if Liberia manages resources from the potential oil boom by prioritizing pragmatic economic development that is central to improving the living standard of all citizens and investing in future saving, there will be no need to panic about the negative consequences of oil boom.
The reasons I set out to argue against how the oil debate in Liberia is proceeding was not to denigrate the efforts of pundits who have versed out their expect opinion about the discovery of oil in Liberia but it is meant to provide clarification on a number of misinformation. However, the ethical thing to do now is to proffer some way forward for the management of oil resources when production starts in 3 to 5 years. The following amongst other relevant factors are what should be done to avoid the negatives of oil resources and will set the path to sustainable economic development:
The government must firstly lower the expectation of the public. In economics, expectation is one of the major factors that impacts demand. The unrealistic expectation that money from oil discovered in Liberia will immediate flow in the economy may potentially have people thinking of increase in disposable income. This may lead to an increase in consumer spending, decreases savings and hurt investment and productivity in other sectors that the economy is currently dependent.
The National Oil Company must capture the actual value of Liberia’s oil deposit and have a total forecast in monetary terms considering the volatility of the price of oil. This will make economic planning easier and predictable. The problem many countries for example Nigeria and Congo(DRC) have been faced with is dependency on spontaneous development, that is expected growth through private sector boom rather than intentional development, that which is underpinned by state intervention through public-private investment with deep regulation. Relying on the private sector to increase employment and inversely impact living standard is a classic economic theory that is being questioned even in capitalist economies such as Europe and the United States. For example the United States has spent more public money in billions of dollars on private investment through bailout fund than any country in the World and Europe is following suit to stabilize the troubled Europe Zone economy.
The second way forward is to have equitable distribution of revenue generated from oil production. This will require governance. I know governance covers a wide range of issues from political leadership to fiscal discipline, rule of law and building strong integrity institutions to fight corruption and other economic cronyism. And these are exactly what I meant when I said governance. This is because all of the elements that constitute governance are inseparable to the just management of revenue from our natural resources especially oil.
Thirdly, we must set an appreciated saving rate from the oil revenue for future consumption. This is because oil like many natural resources may not last forever and because our economy is natural resource reliant, it will be a deadly mistake if we did not save for the future. I know how politically challenging this may be because many politicians in desperation for re-election are usually concern about what the voting public can benefit immediately from resource boom. However, I do suggest that the government must only spend portion of any future savings on current programs and projects that are relevant to the future that which may still be an investment for the future. Such programs must include education (training the masses in skills relevant to local demands), health and agriculture (Food security). Paul Collier, an economist famous for writing about poverty and economic development in Africa calls this type of investment “investing in investment”. Funding for such investment can be sourced from the imposition of natural resource tax which is different from the normal negotiated rate of returns between government and extractive corporations.
The fourth point I wish to make is the setting up of a minimum social protection benefit for the very poor. I do know how much condemnation this will generate especially from those who believe that every neoliberal policy proposed by the IMF and World Bank is the right economic module. I also know that critics will term as a form of communism and socialism the idea of some form of welfare that seeks to avoid the shameful situation of hunger and death from curable diseases confronting poor Liberians. Hypocritically, the very developed counties that dominate the IMF and World Bank do have social protection programs for their citizens. For example in the USA there are food stamp and student loan, Australia has a strong welfare program for the poor, and many Scandinavian countries do provide social protection and welfare in form of social safety net. One may argue that such policy is not implementable in Liberia because more than half of the population live below the poverty line according to the United Nations but the opposite I argue. This can be done with rigorous survey and stratification of the population beginning with a national enumeration and identification process that will set the basis for such safety scheme. I am simply arguing for a minimum protection for those doing very badly and not a full welfare program in this regard.
The discovery of oil in Liberia cannot be compared to the Dutch disease scenario because Liberia is not an industrialized country and does not have industries and manufacturing corporations to abandon in favour of the potential oil producing market. Additionally the management of oil revenue should be analysed from the perspective of economic management than engaging in the cliché of curse and blessing that does not have theoretical and practical economic meaning.
To have the best result from oil production, the government of Liberia must impose a natural resource tax on companies drilling oil in addition to the rate of returns that would be negotiated. For example, if the rate of returns to government and drilling corporation is 45% – 55% respectively, there should be an extra 15 to 20%natural resource tax imposed which can be deposited in future savings. This will then enable the government to invest some revenue from the rate of return in infrastructure, agriculture, health and social protection scheme. The realization of the above will see Liberia easing through economic growth and development with improved living standard for its citizens.
Nya D. Twayen, Jr.
Candidate for Master of Public Policy with specialization in policy Analysis
Crawford School of Economics and Government
Australian National University
About the Author:
Nya Twayen is a former Assistant Minister for Youth Services, Ministry of Youth and Sports and former member of the Board of Directors at the Liberia Electricity Corporation. He holds a graduate degree in Public Administration and studying Master of public Policy at the Crawford school of Economic and Government ANU; and Graduate of the University of Liberia with a degree in Sociology (Summa Cum Laude)